(Alliance News) - Fidelity China Special Situations PLC on Wednesday reported a drop in net assets over a "volatile" first half, underperforming its benchmark.
At September 30, Fidelity China's NAV per share stood at 236.10 pence compared to 255.03p at March 31, a 7.4% drop.
The trust's net assets slipped 7.1%, falling to GBP1.30 billion from GBP1.40 billion six months prior.
Fidelity China's NAV total return in the six months to the end of September was negative 5.9%, behind its benchmark - the MSCI China Index - which only lost 3.3% in the same period.
"The underperformance against the benchmark was due largely to gearing and a larger than benchmark weighting in small and medium sized companies," the Portfolio Manager Dale Nicholls explained.
Fiedelity China did not declare a dividend for the interim period, same as the year before.
At the end of the period, the trust's five largest holdings were Tencent Holdings, Alibaba Group, China Meidong Auto, China Pacific Insurance Group and China Life Insurance - representing 37% of the trust's assets.
Nicholls said: "Bellwether stocks Tencent and Alibaba were caught in the market volatility witnessed during the review period. Tencent's quarterly earnings reported during this time did not meet expectations and disappointed investors. A closer look at these results revealed that its mobile games segment performed well, driven by contribution from its new games, while its fintech business was also strong. Alibaba continued to deliver impressive growth across most of its business lines despite the broader macroeconomic headwinds."
He continued: "Strong performance was seen over the reporting period from selected consumption-led positions. These included the conviction holding in China MeiDong Auto, a prominent automobile dealership network, and exposure to sportswear apparel company, Li Ning."
The manager noted China MediTech and wealth manager Noah Holdings as detractors to NAV. He also said the trust not owning Ping An Insurance hurt returns.
Looking ahead, Nicholls acknowledged the "volatility" of the Chinese markets, where sentiment can "swing sharply". He is "comforted" that the "worst case scenarios" surrounding the US-China trade war are being openly discussed, which, to him, suggests these outcomes are being priced into valuations.
He also noted Fidelity China's portfolio are predominantly domestic focused, so any increase in tariffs should have a minimal impact.
He added: "We continue to highlight the significant valuation gap between large and small cap segments of the China market. Any closing of this gap is likely to benefit our NAV and relative performance. Looking across valuations within the portfolio overall, we are back to levels last seen after the sharp A-share driven correction in 2015, which was an opportune entry point for investors."
Shares in Fidelity China Special Situations were up 0.1% in London on Wednesday at 219.20 pence each.
By Paul McGowan; paulmcgowan@alliancenews.com
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Fidelity China Special Situations PLC (FCSS)